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Would You Like That “Per Stirpes” or “Per Capita”?

May 11, 2011

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There are many scenarios in estate planning where a deceased person receives a gift of property. Someone’s will may not have been amended in time. A trust drafted many years ago leaves an asset to several siblings, one of whom has passed away since the document was created. State intestacy laws designate assets to classes of family members without regard to which ones are alive or dead.

If the initial gift is from a parent to her own child, most states will allow the child’s descendant to step into the child’s shoes and take the gift. This gives the descendant a “right of representation”, and is still effective even if the descendant is not specifically named in the will or trust.

However, things obviously start to get complicated when more children or more descendants are involved. What if the initial gift is to be shared equally between three or four children? What if more than one of these siblings predeceased their parents? What if the predeceased children have multiple children of their own? In what proportions should each beneficiary take?

A Sample Family with Distribution Issues

To help us illustrate how these issues are resolved, let’s create a sample family to help illustrate these issues:

U, a widowed spouse, has three children, C1, C2, and C3.

U also has four grandchildren.

GC1, GC2 and GC3 are C1’s children.

GC4 is C2’s child.

C3 is childless.

We then assume that U passes away, and that at least one of U’s children is already deceased.

Now we discuss the four main approaches to estate distribution to those with a right of representation.

Per Stirpes

Under a “per stirpes” distribution, the property is automatically split into a number of shares that is equal to the number of children the deceased person had. One concern some have with this method is that an inequity is often created at the grandchildren’s generation.

For example, under a “per stirpes” distribution, three shares of U’s estate would exist since U had three children.

However, let’s say that C1 and C2 died before U’s death. U’s grandchildren would then receive unequal amounts:

GC1, GC2, and GC3 would each get one-ninth of U’s estate (they split C1’s one-third share).

GC4 gets one-third outright (C2’s entire share).

C3 gets one-third.

About 25% of U.S. states currently apply this distribution method in its intestacy laws, including Delaware, Florida, Illinois and Ohio (incidentally, for a very, very entertaining description of per stirpes, check out “What Does ‘Per Stirpes’ Mean? Let the Three Little Pigs Show You” on Ohio attorney Matthew Gibson’s Wills & Wealth blog).

“Modified” Per Stirpes

The “‘modified’ per stirpes” distribution combats this potential inequity by creating an exception to the “per stirpes” rule stated above. It states that if all descendants entitled to a share are in the same generation, all of them must receive an equal share.

In the U family example, this would apply only if all of U’s children predecease U.

In that case, GC1, GC2, GC3 and GC4 are all in the same generation, and all are the only takers of U’s estate. Therefore, under a “modified per stirpes” distribution, each would take a one-fourth share.

However, this solution serves to merely delay the potential inequity to the following generation.

Fewer than 10 states apply this rule in their intestacy laws, including Maryland and the District of Columbia.

Per Capita By Representation

Under any “per capita” distributions, gifted property is split into shares equaling the number of descendants in the first generation with any survivors. Strangely enough, under this approach, inequities can be created if the family’s deaths occur in a certain order:

For example, in the U family, if none of U’s children survive, U’s grandchildren’s generation is the first with any survivors. Since U had four grandchildren, each would receive a one-fourth share.

However, let’s instead say that C1 and C2 predecease U. U’s children’s generation is the first with any survivors (C3), so three equal shares are created. Therefore, as a result of the order of deaths, the same inequity resulting from a “per stirpes” distribution would occur:

This rule applies in nearly one-third of U.S. states’ intestacy laws, including Virginia, Pennsylvania and California.

Per Capita at Each Generation

“Per capita at each generation” adds to the “per capita by representation” approach by creating equivalent shares for the members of every following generation. In most cases, the results will be the same as “per capita by representation”, but the attention to following generations is illustrated in this example:

In U’s family, if C1 and C2 predecease U, three shares are created at the children’s generation.

C3 gets a one-third share. Since C1 and C2 are deceased, their one-third shares are combined into a two-thirds share.

U’s four grandchildren split that two-thirds share equally. As a result, they will each receive a two-twelfths, or one-sixth, share.

This approach is used in almost one-fourth of states’ intestacy laws, including Arizona, Colorado, New Jersey and New York.

Conclusion

As always, the recommendation is for you to check your particular situation closely. For your situation, the applicable distribution approach depends either on your state of residence or which one your will or trust contains. In any event, read through these options closely to help you determine the factors that do or do not concern you, and which would make the most sense in your situation.

4 Responses to Would You Like That “Per Stirpes” or “Per Capita”?

A very interesting discussion. I like “per capita in each generation.”

Most of my clients don’t care what the intestacy laws are. The important thing is to get them to explain what they think “automatically happens.” Sometimes they expect that the property will just be divided per capita. Sometimes they expect a deceased child’s share to go to that child’s children. Sometimes they expect the property to go to the child’s spouse if the child dies. Whatever they expect, it’s my job to express it clearly, in legal language, so that what they expect actually will happen.Jennifer Deland recently posted..Case of the lost policy

I agree with you. I am reminded time and again that we are hired not to give the clients an overly technical explanation about estate planning terms and concepts. Instead, it is our job to have their documents be clear to their executors, other attorneys, trustees, etc. But how do you balance the need to explain against getting the clients what they need in an efficient way?

Wow, this has me thinking. Your comments have given me an idea for a blog post regarding this balancing act.

Thanks again for stopping by!

Scott

Ms. Deland is an estate planning, elder law and asset protection attorney and counselor in the Metrowest area of Massachusetts (that’s the area west of Boston and east of Worcester). She is a frequent writer and speaker on these topics as well, and I am flattered that she stopped by and commented here. Check out more of her viewpoints and commentaries on her website, jenniferdelandlaw.com.

What if a trust spans more than 50 years! Typically, beneficiaries will live and die during that period, and the value of the estate goes up and up during that time. How does a will ensure that equal shares are distributed when the value of the estate is changing all the time?

Short example…I get one share of Apple for $1 in 1991 cause my mom passed away. My cousin gets $3 when her mom passes away in 2010. The value of the shares are hardly equal! To value the intent of the will, shouldn’t my cousin’s share be equalized so that by final tally, both of us get equal amounts…i.e, me (1 already got + 1 from her) = 2; and her (3 for her – 1 for me) = 2. ??? Is this not the duty of the executor to enforce?

The nearly infinite lifetime of trusts has certainly been a stated concern of the Obama Administration. Some states presently allow trusts that can last for hundreds of years.

Let’s look at your example. On January 4, 1991, Apple was valued at $10.81 per share, and by January 8, 2010, Apple had increased to $211.98 per share. For simplicity, let’s therefore assume that you inherited your $1 share of Apple on 1/4/91 and that it was worth $19.60 on 1/8/10.

I’m unclear whether you mean that your cousin got $3 in cash or 3 shares of Apple in 2010. If your cousin received $3, it is your proposition that instead of receiving $3, your cousin should instead receive one share of Apple in 2010 so that the amounts you both receive are equalized. If instead, your cousin received 3 shares of Apple, it is your proposition that to equalize your shares, you should be entitled to receive one of her shares to equalize your gifts.

In either case, however, it is the trustee’s duty to exactly follow the words stated in the trust itself; not to interpret what the trust should have said or to deem what should be fair. A properly executed trust (or will) is the only document that can reflect what the deceased wanted to happen since it was signed, witnessed and notarized. This interpretation makes sense because it removes any guesswork for the executor, trustee, court, etc.

In your case, I’ll assume that you are a grandchild of the person who originally created the trust, you have two siblings, and your cousin is an only child. Therefore, either the trust or your state law has required the use of a “per stirpes” or “per capita by representation” scheme. Because your grandparent did not specifically state anything differently in his / her trust, the law assumes that the amounts you and your cousin received reflect your grandparent’s intent even though the amounts are not equal.

Check the trust and your state law for further detail in case there is some intricacy that I’ve missed therein. Otherwise, I’m sorry that my interpretation doesn’t yield a better result for you.